CTA-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for E. I. du Pont de Nemours and Company (DuPont). The company operates as a large accelerated filer. The reporting period reflects the impact of a severe global economic recession, characterized by extraordinary decreases in demand and inventory destocking across most supply chains, with the Agriculture & Nutrition segment being the primary exception showing growth.

Key Financial Metrics

Note: Total Debt calculated as Short-term borrowings ($1,569M) + Long-term borrowings ($8,490M). Q1 2008 debt figures derived from prior period context where specific Q1 2008 balance sheet is not fully detailed in text, though Q1 2009 debt is explicitly stated as $10.1 billion in MD&A.

Material Changes vs. Prior Period

• Revenue Decline: Net sales dropped 20% year-over-year, driven by a 19% decline in sales volume. Volumes outside the U.S. fell 23%, while U.S. volumes fell 14%. A 5% increase in local selling prices was offset by a 5% reduction from currency exchange rates.
• Profitability Compression: Net income fell 59% due to lower sales volumes, higher pension costs, and unfavorable currency impacts. Cost of Goods Sold (COGS) as a percentage of net sales increased from 69% to 75% due to lower capacity utilization.
• Segment Performance:
  • Agriculture & Nutrition: Sales increased 6% and Pre-Tax Operating Income (PTOI) increased 8% to $852 million, driven by higher seed sales and value-in-use products.
  • Coatings & Color Technologies: Sales fell 30% and PTOI swung from a $190 million profit to a $19 million loss due to lower auto production and destocking.
  • Performance Materials: Sales fell 45% and PTOI swung from a $219 million profit to a $146 million loss, impacted by hurricane-related shutdowns and recessionary destocking.
• Other Income: Increased significantly to $399 million (from $195 million) primarily due to a $184 million increase in net pre-tax exchange gains.

Guidance, Outlook, and Risks

• Revised Outlook: DuPont revised its 2009 earnings guidance downward to a range of $1.70 to $2.10 per share. Management anticipates weak demand will persist throughout 2009.
• Cost Reduction: The company increased its full-year fixed cost reduction goal from $730 million to $1 billion. Additional restructuring actions are expected to be finalized in Q2 2009.
• Capital Expenditures: Planned 2009 capital expenditures were reduced to $1.4 billion.
• Liquidity: Management maintains a strong balance sheet with $2.4 billion in cash and marketable securities and access to approximately $2.6 billion in credit lines. Dividends remain at $0.41 per share.
• Key Risks & Contingencies:
  • PFOA Litigation: Significant ongoing litigation and regulatory actions regarding Perfluorooctanoic Acid (PFOA). Accruals of approximately $0.6 million exist for EPA consent orders and monitoring. A settlement regarding drinking water contamination involves potential future costs for medical monitoring (up to $235 million) if a science panel finds a probable link to disease, though DuPont deems this remote.
  • Antitrust: Ongoing EU and US antitrust investigations regarding synthetic rubber markets. A fine of EURO 59.25 ($90.9 million) was provisionally paid in 2008; an appeal is pending.
  • Environmental: Total environmental liability accruals stand at $382 million, with potential liabilities ranging up to two to three times this amount under adverse circumstances.

Investor Verification Checklist

• Verify the sustainability of the $1 billion cost reduction target and the timing of additional restructuring charges expected in Q2 2009.
• Monitor the PFOA independent science panel progress; a finding of a probable link to disease could trigger significant medical monitoring costs ($235 million) and personal injury claims.
• Assess the impact of the global recession on the Performance Materials and Coatings segments, which are currently operating at losses due to low capacity utilization.
• Review the status of the EU antitrust appeal regarding the $90.9 million fine to determine potential refund amounts.
• Confirm the company's ability to maintain liquidity given the cash burn from operations ($832 million used in Q1) despite strong cash reserves.